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The Congressional Budget Office has estimated that Obamacare will reduce the deficit, by coupling a multi-trillion-dollar expansion of federal health spending with cuts to Medicare and higher taxes. Now, a new study by a Medicare trustee suggests that the law will actually increase deficits, over the next ten years, by between $346 and $527 billion. Why do the trustee’s numbers differ from those of the CBO, and who’s right? Let’s take a look.

Chuck Blahous, who was appointed by President Obama to be a public trustee of the Social Security and Medicare programs, published the study, under the aegis of the Mercatus Center of George Mason University. He makes two basic arguments: (1) the ACA’s cuts to Medicare should be counted as contributing to Medicare’s solvency, and can’t be redirected towards reducing the deficit; and (2) it’s likely that Congress will increase the law’s spending, and fail to enforce its spending cuts and tax increases, thereby worsening the law’s fiscal consequences. “Historical evidence suggests that the upholding of [the deficit-expanding and deficit-reducing] provisions may not be equally certain,” says Blahous.

Medicare cuts can’t be double-counted

In March of 2011, Health and Human Services Secretary Kathleen Sebelius admitted that the law double-counts its reductions in Medicare spending, by claiming that the law both reduces the deficit and extends Medicare’s solvency.

Blahous estimates that at least “$470 billion of the Medicare savings under the ACA scored by CBO through 2021 substitutes for savings required under previous law.” Whether or not you accept his approach depends on whether or not you think that Medicare funds should be segregated from the rest of the budget.

“There is substantial risk,” Blahous writes, “that the ACA’s cost-saving provisions will not be enforced as currently specified.” Blahous fears that “elected officials will choose to expand the growth of [Obamacare’s exchange] subsidies in the future relative to projections under current law.”

It’s certainly possible that Congress could flinch on enforcing Obamacare’s cost controls and tax increases. The difference between Blahous’ “optimistic scenario” and his “pessimistic scenario” reflect different levels of Congressional discipline. In his optimistic case, in which Congress left the law intact, Blahous estimates that it will increase the deficit by $346 billion from 2012-2021; in the pessimistic case, he thinks it will increase the deficit by $527 billion: a spread of $181 billion.

The White House goes ballistic

The White House has already responded to Blahous’ report, noting Blahous’ prior ties to the Bush administration, and citing the official CBO numbers to argue that it’s “new math” to claim that the ACA double-counts its Medicare savings. The White House cites a report from the left-leaning Center on Budget and Policy Priorities that says that Republican Congresses engaged in Medicare double-counting with the Balanced Budget Act of 1997 and the Deficit Reduction Act of 2005.

This White House strategy of attacking Blahous’ politics, and repeating “CBO, CBO, CBO” until it’s blue in the face, isn’t likely to persuade anyone. The CBO has, quite regularly, issued substantial caveats with its projections, highlighting many of the same issues that Blahous raises in his report. But CBO is constrained by Congress in how it can quantify those issues, in a way that Blahous is not.

“The improvement in Medicare’s finances,” wrote the CBO in December 2009, “would not be matched by a corresponding improvement in the federal government’s overall finances…The key point is that savings to the [Medicare Hospital Insurance] trust fund under the PPACA would be received by the government only once, so they cannot be set aside to pay for future Medicare spending and, at the same time, pay for current spending on other parts of the legislation or on other programs.”

CBO also regularly puts out an “alternative fiscal scenario,” in which “some current or recent policies are assumed to continue in effect, even though, by law, they are scheduled to change. The decisions made by lawmakers as they confront those policy choices will have a significant impact on budget outcomes in the coming years.” A big part of the CBO’s alternative scenario is an assumption that scheduled cuts to Medicare’s fee schedule are held off.

It’s pretty much the standard left-wing playbook to attack Blahous’ credibility, instead of critiquing his methodology. When one of Blahous’ critics actually reads his report and contests his assumptions, I’ll take notice.

UPDATE 2: Jonathan Chait and Paul Krugman describe the Blahous analysis as "bogus." Chait's critique is that Blahous is a "Republican policy guy." (Are Republicans not allowed to assess the fiscal cost of legislation?) Chait then goes on to complain that Blahous' projections are "completely bizarre" because they assume that the Medicare trust fund would automatically cut benefits when the trust fund expires. "Nobody, and I mean nobody, tries to assess legislation" this way, claims Krugman.

But in fact, as a matter of law, the Medicare Hospital Insurance Trust is only authorized to make benefit payments from the trust fund. As the Medicare Trustees put it in their 2011 Annual Report, "if assets [in the trust fund] were exhausted, payments to health plans and providers could be made only from ongoing tax revenues, which would be inadequate to cover total costs. Beneficiary access to health care services would rapidly be curtailed."

The CBO, in its 2012-2022 Budget and Economic Outlook, says, "In keeping with the rules in section 257 of the Deficit Control Act of 1985, CBO’s baseline incorporates the assumption that payments will continue to be made after the trust fund has been exhausted, although there is no legal authority to make such payments. Because the manner by which those payments would continue would depend on future legislation, CBO does not show a cumulative negative balance in the trust fund after the exhaustion date." (Emphasis added.)

In other words, CBO assumes that Medicare will never go insolvent because Congress takes taxpayer money and uses it to fund Medicare's shortfall, driving up the deficit. But because general revenue is being used for the spending, Medicare trust fund spending goes to zero. Blahous explains it here:

Q: What does all this mean for the overall fiscal effects of the ACA? A: It means the ACA increases spending and worsens deficits relative to previous law. For example, imagine a law that cuts Medicare HI payments by $1 while also spending $1 on a new health program. The $1 Medicare HI spending cut extends the solvency of the Medicare HI Trust Fund, thereby allowing Medicare HI to spend an additional $1 at a later date. The $1 of near-term Medicare savings thus results in an additional $1 of later Medicare spending. Thus, if the law also spends $1 on a new health program, then altogether the law would permit $2 in total new spending while enacting only $1 in savings. On the whole, such a law would increase spending and worsen federal deficits. The case is similar with the ACA.

“This isn’t just a persnickety point about the intricacies of budget law,” Blahous told the Washington Post in a front-page story today. “If Medicare were going insolvent in 2016, you’d better believe right now there would be more pressure on lawmakers to do something about it...It’s essential that there be a full public understanding of the most economically significant federal law in years.”

When it comes to Medicare and the budget deficit, pick your poison.

UPDATE 3: Blahous offers me a more specific response to the Chait/Krugman critique, via email, which he has permitted me to publish:

A couple of points:

1) It's not a conceptual trick. It's not an assumption. It's the law. Some may not like the fact that Medicare can only spend money to the extent that it has a positive balance in its trust funds, but that's the law. The scorekeeping convention that finds that ACA would reduce deficits, by contrast, is not the law. That surely ought to matter.

2) If these criticisms are correct, then the solvency of Medicare literally has no meaning. The finding that the ACA reduces the deficit depends on the critical assumption that Medicare will always pay out full benefits whether there is anything in its trust fund or not. Only in this context can we disregard the implications of the ACA reportedly extending Medicare Hospital Insurance solvency from 2016 to 2024. As soon as someone claims that the ACA extends Medicare HI solvency, then they must concede that my point is correct, because the score finding that the ACA would reduce deficits does not account for any such effect.

3) The total amount of resources required to extend Medicare solvency from 2016 to 2024, and to pay for the new entitlement in the legislation, far exceeds the cost savings in the ACA. Therefore, the law adds to the deficit. If it is not to add to the deficit, then one of the two major spending authority expansions in the law—the Medicare solvency extension or the new health coverage subsidies—won't happen. Which is it?

4) My point is correct both from the standpoint of technical law and from a political economy perspective. Congress is historically much less likely to enact Medicare or Social Security savings if the insolvency date is more distant. Pushing out Medicare's insolvency date thus not only commits additional federal resources in a legal sense, but also in the sense of pushing off the urgency of other cost containment measures. Both by statute and by political behavior, the ACA clearly worsens the fiscal outlook.

UPDATE 4: Chait gets this nugget via email from Blahous' Democratic counterpart on the Medicare Board of Trustees, Robert Reischauer of the Urban Institute:

Under accepted CBO and OMB scoring practices, legislated reductions in Medicare HI spending both reduce the deficit and strengthen the HI trust fund. That has been the case under both D and R Congresses and administrations. Chuck’s “revelation” is not a new charge. Some argued this point when the ACA was enacted. It remains as misleading today as it did earlier.

UPDATE 5: For those who want to dig further into the issue of double-counting Medicare savings, Peter Suderman penned a nice primer in May 2011.

Chuck makes some important points in his analysis. One, which TaxVox has written about recently as well, is the potential double-counting of increased Medicare payroll taxes. The 2010 law raises the Medicare levy by 0.9 percent for high-income workers. But, due to CBO scoring conventions, the money it generates appears to both make the Medicare Hospital Insurance (HI) Trust Fund appear more solvent and reduce the general fund deficit.

It can’t simultaneously do both, as Chuck correctly notes. In reality, if the extra tax goes to the general fund to “pay for” health reform, Medicare would be required to reduce its hospital benefits, absent some other new funding source. Chuck argues Medicare would cut benefits. CBO assumes it would not.

Btw, Chuck and TaxVox are hardly the only ones to have raised this issue. Medicare actuary Rick Foster, who is well-known in Washington for calling ‘em as he sees ‘em, has been making exactly the same point since even before the law passed. My Tax PolicyCenter colleague Donald Marron, a former CBO director, blogged about it all back in 2009. And CBO itself has been upfront about the oddities of this scoring issue.

The government takes in one dollar. It spends that dollar twice. Without further cuts or tax hikes, that means the budget deficit goes up.

Understanding this, I have developed a plan to use trust fund accounting conventions for all my freelance work going forward. First I'll record an increase for each new dollar in a Google spreadsheet titled: Freelance Work Trust Fund Account. Then I'll spend all the money on comic books. In no time at all I'll have a lot of comic books, and a huge trust fund account.

UPDATE 9: Michael Barone pipes in at National Review, noting that it's because of "a 1985 internal ruling (not a full-fledged law passed by Congress) [that] the CBO scores the costs of legislation against a hypothetical baseline rather than against current law."

UPDATE 10: Peter Orszag, the head of the White House Office of Management and Budget during the Obamacare debate, describes Blahous' study as "senseless bloviating." Ouch.